A new market report from Marcus & Millichap has some good news for the San Jose retail market. The report predicts retail rents will grow 2.8% this year, after falling .8% in 2020. If the prediction holds, rents will climb to $36.01 per square foot.
The rebound in retail rents is surprising as the report also predicts a 60 basis point increase in the vacancy rate, climbing to 5.1%. It would be the highest vacancy rate in the market since 2013. It would also outpace 2020 vacancy rate growth, which climbed 50 basis points to 4.5%. Single-tenant retail spaces had the most significant increase in vacancy last year, growing 70 basis points, while multi-tenant spaces only saw a 20 basis point bump in vacancy.
Retail near major tech hubs are the most exposed to high vacancy rates. Many large retailers are planning to welcome employees back to the office, but not until later this year. That will leave retailers without customers or foot traffic for most of the year. However, the report expects retail to rebound swiftly once employees are back in the office. Strong consumer spending could also encourage new retail lease transactions, which will support growth.
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As a result, the tech industry is playing a significant role in the recovery of the retail sector. According to the report, Google and Apple employees will return to the office this year, meaning that permanent remote work isn't a reality—like many thought it would be. In addition, Global cloud-led, data-centric software company, NetApp Inc. signed a long-term 301,019-square-foot lease at Federal Realty Investment Trust's mixed-use complex, Santana Row in San Jose, CA. The space will serve as the company's headquarters, and is another good sign for the market's recovery. The return of these employees will likely fuel recovery across the real estate market, including apartments, retail and hospitality.
These trends will no doubt inform investment decisions. The report expects investors to focus on single-tenant retail properties with national credit tenants, which will help to mitigate risk as the technology industry welcomes back employees. Investors will expand into other retail categories as the economy recovers, but expect low multi-tenant deal volumes again this year.
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Kelsi Maree Borland
